Plaintiffs oppose the motion. They challenge the validity of the arbitration agreements; they argue that the agreements do not apply to them as "mere salespeople;" and they contend that the claims in the amended complaint are outside the scope of the arbitration agreement. Plaintiffs also ask this Court, pursuant to Fed. R. Civ. P. 42(a), to consolidate this action with Dornberger v. Metropolitan Life Ins. Co., 961 F. Supp. 506 (LBS), a related class action suit brought by life insurance policyholders.

For the reasons set forth below, defendants' motion to compel arbitration is granted as to counts one through six of the amended complaint. Plaintiffs' motion to consolidate is granted only with respect to count seven (fraudulent inducement to enter into a life insurance contract).

I. BACKGROUND

A. Factual background.

This action arises out of the same conduct at issue in Dornberger v. Metropolitan Life Ins. Co. et al., 961 F. Supp. 506, 1997 U.S. Dist. LEXIS 3549 a class action brought by individuals living in Europe who purchased the defendants' life insurance policies. Familiarity with the opinion in that case, issued today, and the facts therein, is assumed. See Dornberger v. Metropolitan Life Ins. Co. et al., 961 F. Supp. 506, 1997 U.S. Dist. LEXIS 3549, S.D.N.Y. 1997).

Both cases involve claims that MetLife illegally sold insurance policies to clients living in Europe.
*fn2"
According to the plaintiffs in both actions, the defendants offered these policies for sale even though they were aware that their sale violated European and New York state laws governing the sale of insurance in European countries.

Cular and Pappas allege that they were unwitting participants in, and ultimately victims of, the defendants' illegal insurance scheme. Cular sold "life insurance, mutual funds and other financial products" in Switzerland between 1991 and 1994. Compl. PP 4, 61, 114. Pappas sold "life insurance and other financial products" in Greece from 1977 until 1995 and, from 1990 until 1995, to American military personnel stationed in Germany. Id. PP 5, 59-60, 120-23. They both allege that they were induced to take these jobs based on representations by the defendants that MetLife's overseas insurance sales practices were legal. More specifically, Cular and Pappas allege that the defendants promised them lifetime employment in Europe and lucrative opportunities during the course of that employment, and that they relied on these promises to their detriment. The plaintiffs now argue that the policies were illegal, and that some or all of the defendants knew this from the inception of MetLife's overseas operations.

In 1994, Cular was informed, first by a client and then by Swiss authorities, that the insurance and mutual fund sales were illegal. She in turn notified defendant Ted Athanassiades, President of MetLife. Cular alleges that her superiors responded to her revelation in a retaliatory fashion, despite their explicit assurances that employees would not be punished for revealing illegal insurance practices. The overseas operations (except for those on American military bases) were suspended and Cular and several other European sales representatives were told that they could either accept transfers to the United States or their employment with MetLife would be terminated. Cular made repeated inquiries concerning the terms of her transfer. These inquiries, she claims, were never answered. Instead, the defendants terminated her employment.

In 1995, Pappas was informed by German authorities that the sale of insurance in Germany by MetLife violated German law. He informed the defendants. They subsequently asked him to stop servicing his existing clients in Greece, as insurance sales to those clients were also illegal.

The plaintiffs seek damages for their expenses in relocating to Europe, in setting up sales operations in their respective territories, and in lost commissions, salary and benefits--both retrospective and prospective. They also seek damages for the harm their careers have suffered as a result of their entanglement in MetLife's illegal insurance practices. They claim this entanglement severely limits their ability to work as insurance salespeople and, in the case of Cular, damages her future as a securities broker.

B. The arbitration agreements.

As one of the conditions of their employment, Cular and Pappas were each required to complete a Uniform Application for Securities Industry Registration or Transfer (a "Form U-4"). The Form U-4, promulgated by the Securities Exchange Commission, must be completed by anyone seeking to be registered as a securities dealer. Insurance companies may require salespeople to execute these agreements if there is a possibility that they might also be involved in the sale of securities. Pappas never took the NASD exam and never engaged in securities transactions. Cular concedes that she did sell mutual funds on behalf of the defendants. Id. PP 4, 83, 86-87, 97.

Both Cular and Pappas signed page 4 of their respective Forms U-4. Both indicated in item 10 an intent to register with the NASD (the National Association of Securities Dealers). The arbitration clause of their Forms U-4 is thus subject to the NASD Manual--Code of Arbitration Procedures (the "Manual"). The Manual defines the following disputes as "Matters Eligible for Arbitration":

P 3701. Sec. 1. This Code of Arbitration Procedure is prescribed and adopted pursuant to . . . the By-Laws of the [NASD] for the arbitration of any dispute, claim, or controversy arising out of or in connection with the business of any member of the [NASD], or arising out of the employment or termination of employment of associated person(s) with any member, with the exception of disputes involving the insurance business of any member which is also an insurance company:

(1) between or among members;

(2) between or among members and associated persons;

(3) between or among members or associated persons and public customers, or others . . . .

The Manual then defines a category of disputes for which submission to arbitration is required:

P 3708. Sec. 8. (a) Any dispute, claim, or controversy eligible for submission under [Sec. 1] of this Code between or among members and/or associated persons, and/or certain others . . . arising out of the employment or termination of employment of such associated person(s) with such member, shall be arbitrated under this Code, at the instance of:

* * *

(2) a member against a person associated with a member or a person associated with a member against a member . . . .

On the strength of the Forms U-4, the MetLife Defendants now ask this Court, pursuant to the Federal Arbitration Act, 9 U.S.C. §§ 3 and 4, to compel the plaintiffs to arbitrate their claims and stay these proceedings pending the outcome of that arbitration.

Plaintiffs raise several objections to defendants' motion to compel arbitration. They challenge the enforceability of the Forms U-4; they contend that the arbitration provisions do not apply to them; and they argue that their claims fall outside the scope of the Form U-4's arbitration clause. These are discussed in turn.

Pappas does not allege that he was fraudulently induced to agree to the arbitration clause of his Form U-4. Rather, he alleges that he "was told that [the Form U-4] was only an application to take a licensing exam." Pappas Decl. P 3. He insists that he was unaware that by signing the Form U-4 he was agreeing to arbitration. Id. To the extent that Pappas is asserting a claim of fraudulent inducement, he attacks the Form U-4 as a whole, and thus raises an issue for the arbitrator, not this Court. See Manning, 833 F.2d at 1103.

Cular alleges she was fraudulently induced to enter into the arbitration agreement. Her allegations must be resolved by this Court, prior to compelling arbitration, as they raise the question of whether she did in fact agree to arbitration. See Doctor's Assocs, 66 F.3d at 457.

In resolving whether a party was fraudulently induced to enter into an arbitration agreement, a court should apply state contract law principles. See First Options, U.S. at , 115 S. Ct. at 1924.

Plaintiffs next argue that they are not subject to the arbitration rules of the NASD, as they are not "associated persons" as defined in the NASD By-Laws.
*fn5"

While plaintiffs may not fall into any of the categories enumerated in the NASD Manual, this Court need not reach that question. Several courts have read the Securities Exchange Act of 1934 (the "34 Act"), 15 U.S.C. § 78c(a)(21) as providing a superseding definition of "person associated with a member" or "associated person of a member," in light of the fact that the NASD derives its authority from the 34 Act. See, e.g., Edelman v. Marek, 1992 U.S. Dist. LEXIS 16313, No. 91 Civ. 6889 (TPG), 1992 WL 321715, at *6-7 (S.D.N.Y. Oct. 23, 1992); Chisolm v. Kidder Peabody Asset Mgmt, Inc., 810 F. Supp. 479, 480 n.2 (S.D.N.Y. 1992). The 34 Act includes in its definition of "associated persons" employees of a member. 15 U.S.C. § 78c(a)(21) (1981). Cular and Pappas were, at the time of the execution of their Forms U-4, indisputably employees of MetLife, and thus fall within the reach of the arbitration provisions of the NASD Manual.

Plaintiffs rely solely on a recent decision from the District of New Jersey for the proposition that there is a category of disputes that, although they involve employment-related issues, are nonetheless outside the scope of the NASD Code of Arbitration because they involve a NASD member's "business of insurance." In re Prudential Ins. Co. of America Sales Practices Litig., 924 F. Supp. 627, 640-42 (D.N.J. 1996). In re Prudential is the first decision to reject arbitration based on the "insurance business" exception. Compare Armijo, 72 F.3d at 800; Salloum v. Metropolitan Life Ins. Co., Civ. No. 95-1691 (AMW)(JAP), Order Adopting Report & Recommendation (D.N.J. Aug. 2, 1995). In so doing, Judge Wolin raised for the first time the question whether there are any circumstances in which a district court can deny a motion to compel arbitration of an employment dispute with a member of the NASD. Prudential, 924 F. Supp. at 640. He concluded that there may be situations in which the questions posed by the dispute may be so intertwined with the business of insurance as to overtax the capabilities of an arbitrator trained in securities disputes, id. at 640-42, the concern which led the NASD to adopt the insurance business exception.

In order to prove the violation of European laws, plaintiffs will have to prove (a) conduct by the MetLife Defendants; (b) regulations in each country in which the conduct took place; and (c) a failure on the part of the MetLife Defendants to comply with those regulations. See Compl. PP 66-77. Taking the exhibits attached to plaintiffs' counsel's declaration filed in opposition to this motion as indicative of the simplicity of that analysis, we conclude that whether or not the policies sold in Europe violated European insurance or other laws is as easily resolved by an arbitrator as by this Court. Each country requires filings and registrations; MetLife either did or did not comply with those requirements. Conover Decl. in Opp'n Exs. A-E.

The plaintiffs also claim that part of defendants' scheme involved plaintiffs in the sale of insurance policies which were said to be secured by the New York state Life Insurance Guaranty Corporation, when in fact they were not. See N.Y. Insurance Law § 7701 et seq. (McKinney 1997). Compl. PP 78-82. Plaintiffs claim they are now exposed, as salespeople, to civil and criminal penalties in New York. Id. P 82. This element of their complaint presents a slightly more complex question, the resolution of which will involve an interpretation of insurance law. However, the question raised is a discrete one. An arbitrator would have to determine whether the plaintiffs sold any insurance policies with an accompanying representation that they were covered by the Guaranty Corporation, when in fact such policies were not covered, as defined by New York law. N.Y. Insurance Law § 7703 (McKinney 1997).

The insurance law inquiry antecedent to the resolution of counts one through six (whether involving European or New York law) is insufficient to trigger the insurance business exception. Because this case is primarily a "garden-variety" employment dispute, the Court cannot say "with positive assurance" that the insurance law components of this case bar arbitration of the underlying employment disputes. See Jameson, 102 F.3d at 65. Therefore, we find that counts one through six of the amended complaint lie outside the narrow confines of the insurance business exception and thus, are arbitrable.

Count seven of the amended complaint, fraudulent inducement to enter into a life insurance contract, does fall within the insurance business exception as it is brought by the plaintiffs in their capacity as insurance policyholders. As such, this count is not arbitrable.

Pursuant to its authority under Fed. R. Civ. P. 42(a), this Court orders the consolidation of count seven of the amended complaint in this case with the Dornberger action. The balance of plaintiffs' motion to consolidate is denied.

Our website includes the main text of the court's opinion but does not include the
docket number, case citation or footnotes. Upon purchase, docket numbers and/or
citations allow you to research a case further or to use a case in a legal proceeding.
Footnotes (if any) include details of the court's decision.

Buy This Entire Record For
$7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.